Engineering a Waqf for Microfinance: The Fael Khair Program

S/he was a donor with a difference. A single donation of SAR500 million or USD130 million was large enough to be conspicuous. What was unique about this donation however, was that the donor did not wish to be named; in the tradition of a giver whose left hand does not know what the right hand spends (Bukhari 24:11). The donor placed the amount with the Islamic Development Bank (IDB) with an express intention that the same would be used for the benefit of victims of cyclones and natural calamities in Bangladesh. The outcome of this was the Fael Khair (The Philanthropist) Program.

The benevolent act was motivated by the urgent need to help the victims of cyclone SIDR, which devastated the southwestern coast of Bangladesh in November 2007, resulting in loss of life and considerable damage in 30 of the 64 districts of the country. In seeking a long-term solution to the problem cyclones being a recurring phenomenon in the country the project aimed to construct several hundred school-cum-cyclone shelters in the coastal belt of Bangladesh as well as to provide urgent relief and support to the affected farmers, fishermen and small businesses. IDB as manager of the Waqf signed a Memorandum of Understanding (MOU) in May 2008 with the Government of Bangladesh. According to the MOU, IDB would implement the program and the Government of Bangladesh would provide all necessary assistance and support to IDB to ensure the successful implementation of the program. In order to maximize utilization of the funds, the government of Bangladesh provide the program with complete waiver of taxes and duties. The Fael Khair Program has two main components:

• The Fael Khair project with a corpus of USD110 million involved the construction of school-cum-cyclone shelters.
• The Fael Khair microfinance program with a corpus of USD20 million, which aims to rehabilitate and restore livelihoods of cyclone victims was registered as the Fael Khair Waqf under the provisions of Waqf Ordinance 1962.

Provision of Schools-cum-Shelters

The school-cum-cyclone shelters are supposed to serve as protective shelters during calamities. The buildings are also to serve as school buildings during normal times. This would maximize asset utilization and save maintenance costs. The designs of the buildings were carefully chosen after being adjudged the best in an International design competition organized by IDB in 2009 that emphasized its alternative use during normal times and calamities as well as conformity to Islamic culture while achieving efficiency through making best use of locally available resources. An international jury comprising of four competent architects chose two designs as winners out of a total of 77 designs: (1) killa type, and (2) shelter-on-stilt type.

Killa: This is to be used when (i) surge height does not exceed 1.8m and (ii) there is enough area for the artificial hill to be raised. Its capacity as school is 240 students divided in six classrooms in addition to a teachers’ room (ten teachers per room). Its capacity as shelter is 2000 persons (500 households) and 500 heads of cattle. It has two stories with a gross internal area of 715m2.

Stilt: This is to be used when (i) surge height exceeds the maximum height of 1.8m while still below 6m and/or (ii) the available area were too small for the artificial hill to be raised. Its capacity as school is 240 students divided in six classrooms in addition to a teachers’ room (ten teachers per room). Its capacity as shelter is 2000 persons (500 households) and 400 heads of cattle. It has three stories with a gross internal area of 1,150m2.

The coastal area vulnerable to natural calamities is divided into four zones 1-4 with 54 sites, 37 sites, 32 sites and 22 sites respectively for construction of the school-cum-shelters. By end 2013, a few have already entered the final stages of construction.

Microfinance

This component of FKP with US$ 20 million funds was initially aimed at providing urgent relief to the victims of the SIDR cyclone in the form of agricultural inputs and support for small businesses. In order to implement the program, the IDB signed three-year (extendable) agreements with four NGOs – Islami Bank Foundation (IBF), Muslim Aid, Voluntary Organaization for Social Development (VOSD) and BRAC that would implement the program. The microfinance intervention would involve provision of interest-free (qard) microloans as well as training to the cyclone victims in order to help them make up for their losses and live a decent life. When the agreement period of three years is over, NGOs are to return the funds by depositing them into the Fael Khair Waqf account in Bangladesh. The Committee of Mutawallis would then decide on further renewal of agreements with the partner-NGOs.

The NGOs continue to implement this program with the exception of BRAC, which chose not extend its contract.

The Islami Bank Foundation (IBF) operating from 28 unit offices in the SIDR affected 12 districts of Bangladesh has received two tranches of US$ 4.5 million each from IDB (total of BDT 615.309 million). Up to June 2012 IBF has disbursed BDT 2,961 million to 49,287 beneficiaries in 23 Upazillas of 12 districts with an overall recovery rate of 99.70%.

Muslim Aid operating from 13 unit offices covering 449 villages in 13 Upazillas in 6 districts. It has received USD 3 million (BDT 205.103 million) from IDB. Up to June 2012, it has disbursed BDT 1,269 million to 26,730 beneficiaries with a loan recovery rate of 99.74%.

VOSD operating from 12 branch offices in four SIDR affected districts also received USD 3 million (BDT 205.103 million) from IDB. Up to June 2012, VOSD disbursed BDT 1,167 million to 70,749 SIDR affected beneficiaries with a loan recovery of 99.33%.

BRAC operating from 27 Unit Offices covering 1,080 villages of 27 Upazillas in 7 districts received US$ 5 million from IDB. As of June 2012, BRAC disbursed BDT 888 million to 53,61 beneficiaries with a recovery rate of 100%.

The NGOs together recruited and trained some 774 staffs and are operating through 80 field offices in the areas most impacted by the cyclone. Up to January 2014, qard amounting to BDT 8 billion (roughly US$ 105 million) has been disbursed to 192,821 beneficiaries. This implies that the principal fund of the program (amounting to US$ 20 million) has been recycled 573%. Qard repayment rate was as high as 99.75%. In addition, 196,710 beneficiaries were trained through 6,338 training courses on agriculture, cattle rearing, and fishing and fish farming.

In 2012 the NGOs cooperating with IDB to implement the activities of the Fael Khair Waqf were instructed to start implementing their exit plan by repatriating one third of the Program funds back to the Fael Khair Waqf. It was then up to the Committee of Mutawallis to decide how to use the repatriated funds. The repatriated funds have been put in Islamic investment avenues generating returns in the range of ten percent per annum that could now be used to cover the administrative costs of the Fael Khair Rehabilitation Program.

The Fael Khair program provides an excellent example of how a benevolent cash donation could be used to engineer a waqf. It is also a rare example of how high administrative costs of a poverty alleviation program (with finance as well as skill enhancement inputs) may be absorbed by returns generated on a waqf dedicated to the poverty alleviation objective.

That conventional microfinance involves high costs for the beneficiary making it unaffordable to the ultra-poor is an empirical fact. This is of course, sought to be justified on the ground that microfinance involves high administrative and operational costs. Nowhere is this phenomenon more objectively documented than in Bangladesh, which is often referred to as the university of microfinance. Islamic economists have sought to offer a solution to this problem by suggesting an integration of zakah and/or waqf with microfinance. A cash waqf with returns dedicated to absorb fully or partly the costs of financial and non-financial services (similar to finance-plus or finance-multiplied model of BRAC) may be able to ensure that loans are offered at zero or low costs making them riba-free as well as affordable to the poorest of the poor. Fael Khair Waqf offers a real-life exposition of this solution to poverty and destitution offered by Islamic economics.

Mohammed Obaidullah | April 11, 2014